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Financial Strategies
Having a Sound Financial Plan is Key
By John Vyge
Certified Financial Planner™ Professional, Hillebrand Financial Planning LLC
Before you start investing your family’s hard earned assets, having a sound financial plan in place is the key to making sure your investment choices are well directed. Below you’ll find some of the steps you can take to prepare your financial plan in advance. As always, it’s always best to speak to a professional financial planner in advance before implementing:
Step 1: Insure the income earner's paycheck with both Life insurance and Disability insurance. If something happens to him/her, then the family won't have a financial burden. A simple rule of thumb is to insure 60% of the income earner's salary with inflation increases for disability insurance and 20 times the income earners' salary for life insurance, but speak to a professional financial planner to find out the amount and type of coverage that’s right for you.
Step 2: Put away a six month Emergency Fund to be used in the event of job loss or medical emergency, equal to six months worth of living expenses. Save 3 months worth in a money market fund, and the other half in a 6 month CD to maximize your rates.
Step 3: Setup a Home Equity Line of Credit equal to six months of living expenses, as a back up to your emergency fund. This will increase your safety net to 1 year’s worth of living expenses, ample time for an out of work person to get back to work after a job loss.
Step 4: Put together a budget that allows for saving at least 10% of the income earner's income. The budget should show the income earner's monthly income, and all monthly cash outflows of the household. Look for ways to cut out/down all non-discretionary spending in the budget such as eating out, entertainment, and others.
Step 5: Pay off all non-mortgage and non-vehicle debts... especially credit card debt. As a simple rule of thumb, keep your monthly housing expenses to less than 28% of the income earner's gross monthly income and total monthly debt payments to less than 36% of gross monthly income.
Step 6: Make sure you are saving at least 10-15% of the income earner's paycheck towards retirement. If money is tight, consider saving in this order. Save up to your employer's 401k match first, and then use the rest of your savings money to fund a Roth IRA for each of you (assuming you qualify). Then if you still have excess cash remaining, up your 401k contributions. Consider saving for your children's college only after you have taken care of your retirement savings.
It's a simple philosophy. Financial planning first - then investing, to keep your investment choices moving in the direction you want them to. As always, it’s always best to speak to a professional financial planner in advance before implementing because assumptions and recommendations need to be customized to your specific situation.
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